Word-of-Mouth Communication and Social Learning

Word-of-Mouth Communication and Social Learning

February 1995 | Ellison, Glenn, and Drew Fudenberg
This paper examines the impact of word-of-mouth communication on social learning in a population of agents making decisions between two products or practices. The authors find that the structure of the communication process significantly influences the tendency of agents to conform or diversify their choices. Specifically, less communication, represented by smaller but nonzero samples for each agent, increases the likelihood of conformity. Despite the agents' naive decision rules and the stochastic environment, word-of-mouth communication can lead all agents to adopt the action with the average superior payoff, achieving socially efficient outcomes. These outcomes are more likely when each agent receives very little information. The paper also explores the implications of different levels of inertia and the presence of common shocks, and provides a mathematical characterization of the system's behavior near its endpoints. The results suggest that efficient social learning can occur even with limited communication, provided that the tendency towards conformity is strong enough to counteract the forces favoring diversity.This paper examines the impact of word-of-mouth communication on social learning in a population of agents making decisions between two products or practices. The authors find that the structure of the communication process significantly influences the tendency of agents to conform or diversify their choices. Specifically, less communication, represented by smaller but nonzero samples for each agent, increases the likelihood of conformity. Despite the agents' naive decision rules and the stochastic environment, word-of-mouth communication can lead all agents to adopt the action with the average superior payoff, achieving socially efficient outcomes. These outcomes are more likely when each agent receives very little information. The paper also explores the implications of different levels of inertia and the presence of common shocks, and provides a mathematical characterization of the system's behavior near its endpoints. The results suggest that efficient social learning can occur even with limited communication, provided that the tendency towards conformity is strong enough to counteract the forces favoring diversity.
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